Industry is doing well, services are burdened with lockdowns

European industry is doing well. Very good even. The service sector, on the other hand, is invariably burdened with protracted lockdowns. Overall, however, the picture drawn by the latest PMI readings is positive.

The highlight of Friday in the financial markets is the publication of flash PMI indices for February. This is the most up-to-date data that gives an insight into the economic situation in the largest European economies. And she's not bad. Moreover, when it comes to the industrial sector, it looks like another gear has been shifted in early 2021. The data can be classified as very good, bordering on excellent, which surprised analysts. 

Be sure to read: Industrial production - what is one of the most important macro indicators

Industry in focus

Industrial PMI for German unexpectedly jumped to 60,6 points. from 57,1 points in January, while its fall to 56,5 points was expected. The corresponding PMI for France accelerated to 55 points. from 51,6 points, with the forecasted decline to 51 points.

On the other hand, the prolonged pandemic lockdowns invariably limit the activity of the service sector. Even here, however, it is difficult to talk about a tragedy. The sector is doing worse than in January, but it is far from the spring levels. The service PMI for France was 43,6 points in February. (forecast: 47 points), for Germany 45,9 points. (forecast: 46,5 points), and for the Euro Zone - 44,7 points. (forecast: 45,9 points). 

Compared to continental Europe, the service sector in Great Britain, which started to recover after Brexit and the difficult pandemic situation at the beginning of the year, looks good. As a result, the PMI index, to a great surprise, rose to 49,7 points. from 39,5 points in January, approaching the 50 point limit that separates development from recession. Meanwhile, the market consensus was at 40,5 points.

Preliminary PMI readings (February 2021). Source: macroNEXT

The February PMI readings are in line with the market narrative that most economies have learned to function in times of a pandemic, and the ongoing vaccination program, although in many cases not progressing as fast as the rulers would like, will eventually end the pandemic. It is also then that a strong economic rebound will begin, fueled by the return to normal human activity, ultra-loose monetary policy and government support programs. Thus, the data support expectations of a continuation of the boom in stock markets and commodities.

For the currency market, these strong industrial figures from Europe mean support for the single currency, which has been systematically losing to the dollar in the macro data field for several weeks. And it shows in behavior EUR / USD. The pair returned above $ 1,21, moving away from the support around 1,20 and leveling the Tuesday-Wednesday decline. Further increases are real. On the basis of technical analysis, EUR / USD still has a chance to return to the highs from early January (1,2350). However, it will be much more difficult than at the beginning of this week. In the medium term, a fall below 1,20 is still the baseline scenario.